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eBay's Quest for Dongle Domination

PayPal's new dongle could lead to massive returns.

Have you ever been at a store that doesn't take credit cards and gotten stuck in line behind someone who just can't seem to find correct change? This scene could've been avoided if the owner of the shop had found a cost-effective way to accept plastic. Thanks to eBay(Nasdaq: EBAY), you may never have to worry about this debacle again.

eBay and PayPalIn 1995, Pierre Omidyar created the world's largest online auction house. Seventeen years later, eBay is still going strong, thanks in part to one segment drastically outperforming all others, increasing revenue 26% year over year, and blowing away the competition: PayPal.

Acquired as an easier way for buyers to purchase things from eBay, PayPal has grown to become a strong company in its own right. eBay can thank PayPal for 38% of the company's revenue from last year. With more than 113 million registered accounts, PayPal has been an incredible investment for eBay, and now the company is growing on a whole new level.

What's a dongle?PayPal wants to jump off your computer screen and into the real world; that's why it has recently unveiled its new PayPal Here device. The triangular dongle (no, really, that's the technical name for it) plugs into a merchant's mobile device and allows the seller to swipe a buyer's credit card. PayPal takes a 2.7% cut of the transaction, while the seller gets to work with customers who don't have to dig around for loose change and not make everyone in line want to jump in front of a bus.

The benefits of such a system are obvious for small businesses that want to sell to customers without cash and don't want to buy a register. But even some bigger names have gotten behind PayPal. Recently Home Depot, Abercrombie & Fitch, Jos. A Bank, and others have integrated PayPal into their existing register platforms. A successful implementation may see more widespread use.

In the Here and nowThere are some obvious benefits to Here for eBay as well, not the least of which is the potential to revolutionize payment methods. Of course, before that happens, the Here needs to break the current barriers surrounding it. That means making inroads into different businesses, convincing them that the low hassle payment method is better than the old and stale version of yore. And I really do mean low hassle; the "fees" section of Here's website is all of one page. Compare that with Visa's (NYSE: V) four pages (packed quite tightly with 152 different categories of rates), or MasterCard's (NYSE: MA) 131-page behemoth, and you can see why sellers might prefer to deal with PayPal.

Also note that PayPal has made Here available to merchants for the best possible price: free. All an aspiring Here user needs to do is download the Here app (also free, not to mention capable of scanning a check for that slow customer ahead of you in line), and then request a Here dongle. In a few days it will be at your door and ready to scan some happy customers and their voluptuous credit accounts. Compare this with point-of-sale systems, which can run a business anywhere from $1,500 to upwards of $20,000, and the advantages to Here only become more obvious.

A Square latteStanding in PayPal's way (much like the guy who only pays for things in quarters) is Square, the brainchild of Twitter founder Jack Dorsey. Square's main product is its payment dongle shaped like a ... well, you know. Although created well before PayPal's Here, Square hasn't gained too much traction with large merchants -- until now.

Earlier this week, Starbucks(Nasdaq: SBUX) announced that it has teamed up with Square, cutting a deal that will move Square payment systems into 7,000 Starbucks stores all over the United States. The deal has clear benefits for both sides: Square gains huge media and consumer attention by being brought into the largest coffee chain in the world, while Starbucks gets an easier method for customers to pay.

All you've gotta do is pay, palSo what's all this mean for an investor like yourself? It means that eBay is sitting on a potential game-changer, one that challenges the old payment methods with an innovative and accessible way for business to accept money. With other great projects down the pipeline (like its new same-day delivery), excellent financials, and a cheap P/E of 15.8, eBay looks like a mighty tempting investment right now. Keep that in mind as you stand in line behind the fool (small "f") who just dropped the handful of pennies he'd spent 20 minutes digging up, and be content in the knowledge that this could all change one day.

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Author

Mark Reeth is an incredibly handsome Consumer Goods editor, and is an expert on all things that fall within the Consumer Goods sector (especially video games). Follow him on Twitter for all of the most important CG news.